Given the improving supply-demand dynamics, we are optimistic about RevPAR growth in 2018, especially the second half. Based on feedback from REITs as well as our channel checks, we expect low to mid- single digit RevPAR growth for 1Q18.

Our Record of Check-ins and Check-outs

Our 29 Jan 2018 Sell call on the CDL Hospitality Trusts (CDLHT) happened to coincide with the sell-off in REITs a few days later, and was thus very well-timed in retrospect. CDLHT posted a - 7.3% total return till its 12 Feb close, after which we upgraded it to Hold. In comparison, FEHT’s unit price has posted a resilient 1.4% in total returns since we upgraded it to Buy on 12 Jan 2018, relative to the -5.5% total return in the FSTREI over the same period. We decided to downgrade OUE Hospitality Trust (OUEHT) from Buy to Hold on 2 Nov 2018 – at that time, it had posted total returns of 28.0% since our Buy call, beating the FSTREI by 10.8 ppt over the same period. As of 8 Mar 2018 close, its unit price is up 5.5% from the time of the downgrade. We have maintained a Hold rating on ART since 25 Jan 2017, and the REIT has posted a 12.3% total return since then till the 8 Mar 2018 close.

Some "Rooms" Are Still on Discount!

Going forward, there are two things for investors to note when looking at the sector. First, we believe operational upside has largely been priced in for the hospitality REITs under our coverage. We still find yield spreads unattractive despite the 6.1% correction in the FSTREI since the start of Feb till 8 Mar’s close.

Hospitality REITs under our coverage are currently trading at FY18F dividend yields of 5.8% to 6.2%. Should there be any upside surprise, we believe it would likely come from FEHT which underperformed in FY17 and stands to benefit the most from a strengthening in corporate demand.

Second, we expect that the unit price movement for the hospitality REITs will likely be dominated by fund flows into or out of the SREITs space in the next few months, rather than by sub-sector specific factors, as the focus turns to the pace of interest rate hikes. We recognize that REITs remain vulnerable to the dynamic interest rate environment and suggest focusing on names with clearer value propositions at this price point.

Far East Hospitality Trust [BUY; FV: S$0.75] remains our favored pick within the sector. In addition, we continue to like Hotel Properties Limited [BUY; FV: S$4.74], which we see as a neglected proxy to a stronger hospitality market worldwide. Maintain NEUTRAL